I don’t want to go into too much detail about DeFi, since there are a lot of great resources available online such as the official Ethereum website or the Finematics Youtube channel. But here a few points, that distinguish DeFi from traditional finance [1]:
- DeFi offers new and potentially lucrative investment opportunities (lending, liquidity providing, yield farming…)
- In DeFi your money is held by yourself and not by companies (banks)
- DeFi is open to anyone
- DeFi markets are open 24/7
- DeFi is built upon transparency where every transaction is permanently and immutably written to a public ledger
Although DeFi is generally open to anyone, the already mentioned congestion of the Ethereum network leads to very high transaction costs (in peak times +100$) which ultimately excludes participants with less financial resources. Luckily, innovative scaling solutions are currently being deployed to Ethereum that make transactions much faster and cheaper.
Polygon (previously Matic Network) currently offers scaling solutions with their Plasma and PoS (Proof-of-stake) chains and plans to offer rollups in the future. Two major DeFi apps on Ethereum, namely Aave (lending/borrowing protocol) and Curve (automated market maker), launched their successful applications already on Polygon were able to attract a lot of capital (1.85 billion and 180 million $ respectively as of April 29th, 2021). Especially Curve offers attractive rewards that no bank account can compete with.
To use DeFi, you need an Ethereum wallet to store your cryptocurrencies. Although there are several options out there, I recommend Metamask which is a browser extension and makes the interaction with Decentralized Apps easy. When you first download Metamask, make sure that it is the real Metamask from https://metamask.io/.
Once you have set up your account, you could fund it with ETH or another Ethereum compatible currency (ERC-20 token). But since we want to use DeFi on Polygon, we need to prepare our wallet for the Polygon Mainnet. To do so, click on the Network selection dropdown in Metamask and then select Custom RPC. There you have to enter the following configurations with the new RPC URL https://rpc-mainnet.maticvigil.com/ and the Block Explorer URL https://explorer.matic.network/.
After the configuration of your Metamask wallet, I recommend visiting https://wallet.matic.network/ and login in with your wallet. This is the official Polygon wallet that provides a bridge to transfer funds between the Ethereum Mainnet and Polygon. You should also get airdropped 0.001 MATIC that helps you to pay for your first transactions.
We are almost ready to use DeFi on Polygon, however, we need to fund our account first. If you already hold cryptocurrencies in your wallet on the Ethereum Mainnet, then you could use the Matic wallet to transfer those funds. Remember, you will pay Ethereum based fees to send your coins to the Polygon Mainnet.
Fiat on-ramp services, such as Ramp, provide another, very convenient solution. To start with DeFi, I would recommend buying some MATIC (to pay for transactions) as well as stable coins that are 1:1 pegged to the US Dollar (such as DAI or USDC) to invest in DeFi protocols. In the following, I will show you, how to buy DAI for your Polygon account with Ramp.
If you open Ramp and start the buying process, you can select the desired cryptocurrency you would like to purchase. If you search for DAI, you will find three options (DAI on Ethereum, DAI on Polygon Chain, and xDAI). Make sure to select DAI on Polygon Chain. If you choose DAI on Ethereum, you will notice a big difference in network fees (12.44€ vs. 0.01€). After picking your desired amount you would like to buy, click proceed.
After providing your email address and validating it, you will be asked to enter your Polygon address. You can easily copy your address to your clipboard from your Metamask wallet by clicking the account button. Make sure the two addresses match and then you are good to make your purchase.
In the next steps, you have to choose your payment method and then proceed with the payment. Ramp makes it easy to pay with Revolut, but the fees are higher than with a normal bank transfer. Although credit card purchases are the most convenient way to pay for your DAI, they come with the highest fees. You will receive your DAI after the proposed time depending on your payment method.
Congratulations, you can now start exploring new investment opportunities without paying tremendous amounts in transaction fees! Before you jump into DeFi however, I recommend getting familiar with the topic first and learning more about the risks that come with these applications and investments.
As a first step, I would strongly recommend you to get some MATIC to always be able to move your funds and pay the transaction costs, even though they are incredibly cheap. One way of doing this is by using Ramp as described above and buy MATIC directly. But since you already have DAI, we could use those to buy some MATIC on a decentralized exchange such as QuickSwap.
If you decide to provide liquidity to Curve, go to their application and connect your Metamask wallet. Then click on the aave pool (only pool as of April 29th, 2021) and deposit. Now you can deposit your DAI. To earn MATIC rewards on your provided liquidity, you have to stake your curve liquidity provider tokens in gauge. Again, this is no financial advice, and please make sure, you are familiar with the risks if you want to invest.
Congratulations, you made it this far and you have set up your account and maybe even started exploring DeFi at a fraction of the cost compared to the Ethereum Mainnet.
I hope my guide was helpful and valuable for you! Feel free to ask me if something was unclear. If you would like me to write more about DeFi, please let me know in which fields you would be interested.
Thank you very much for reading and I wish you a successful day 🙂
[1] Ethereum Foundation. Decentralized finance (DeFi). Retrieved from https://ethereum.org/en/defi/
Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://sebastian-guggisberg.medium.com/step-by-step-guide-to-decentralized-finance-without-gas-fees-on-ethereum-with-polygon-43dcc7fc2021?source=rss——-8—————–cryptocurrency
